Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior

33 Pages Posted: 8 Jun 2004 Last revised: 14 Jul 2022

See all articles by Kathryn M.E. Dominguez

Kathryn M.E. Dominguez

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; National Bureau of Economic Research (NBER)

Peter B. Kenen

Princeton University - Department of Economics

Date Written: April 1991

Abstract

Empirical work on exchange-rate behavior under a target-zone regime has used data produced by the European Monetary System (ENS) and has found that the data contradict important predictions made by the standard target-zone model. We argue that the contradictions reflect a misinterpretation of policies pursued by the ENS countries. They intervened intramarginally, to keep exchange rates well within the target zone, rather then intervening at the edges of the zone to prevent rates from crossing them. In the Besle-Nyborg Agreement of 1987, however, the ENS countries agreed to make fuller use of the band, and the effects of the agreement show up strongly in the data. Exchange rates behave differently after the agreement than they did before. The effect appears clearly in the behavior of the French franc and less decisively in the behavior of the Italian lira. The paper concludes by examining and rejecting alternative explanations for the observed differences in exchange-rate behavior.

Suggested Citation

Dominguez, Kathryn M.E. and Kenen, Peter B., Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior (April 1991). NBER Working Paper No. w3670, Available at SSRN: https://ssrn.com/abstract=312448

Kathryn M.E. Dominguez (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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Peter B. Kenen

Princeton University - Department of Economics ( email )

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